Payroll is mandatory compensation made by a business to its employees for a designated period or on a particular date. In big companies, payrolls are usually handled by the accounting or human resources department. For small-medium enterprises, payrolls can be managed by the business owner or any other person in charge of the business.
Payroll processing is an essential feature of a business as it impacts employees’ motivation, acts as evidence for legislation compliance, and reflects a business’s image and financial stability. From the financial perspective, payroll accounting makes sure that all employees get the proper remuneration. This entails ensuring employees are paid appropriately and tracking payroll expenditure to make sure the company is not spending money in the wrong way.
A payroll that is free from errors must maintain proper records of employees such as work time, overtime, attendance, and bonus. Most businesses have faced Internal Revenue Service (IRS) penalties due to improper payroll filing, which eventually become costly to fix, both in time and financially.
So, what are some of these common payroll errors that occur during the payroll process? Are they easier to navigate, avoid and rectify? The most popular errors committed during payroll filing can be avoided and fixed with proper planning. Below are some of the common payroll mistakes and how they can be avoided.
1. Improper Classification of Employees
Company workers can work as either autonomous contractors or as employees. They can also be exempt or non-exempt as stipulated by the Fair Labor Standards Act (FLSA). In most cases, it can be challenging to identify whether a worker is supposed to be in the category of a company staff or an autonomous contractor.
Although the Department of Labor (DOL) makes clear the criteria of worker’s categorization, a company can identify the right selection depending on the nature of the work done by the worker. For instance, an individual is an autonomous contractor if the payer has no control of how they perform their tasks but only the result.
One of the most common payroll errors to look out for is improper payroll filing. This happens where a contractor is given compensation and paid for extra working hours while the same is omitted for the employee. Eventually, the employee fails to pay the employer the portion of money deducted from their salary, thus omitting to pay the required income tax. Such misclassification could attract hefty penalties and incur interest while paying taxes.
Job duties, roles, and responsibilities determine whether an individual is an exempt or non-exempt employee. In most cases, salaried employees can be classified as exempt workers who work on hourly shifts can be categorized as non-exempt. Non- exempt employees are entitled to FLSA protection and have the right to get paid for the additional working hours while exempt employees are not.
How to Avoid It
Improper classification of employees is one of the most expensive payroll mistakes that a small business can commit. Therefore, it is imperative to ensure you understand every worker’s nature of work while bringing them on board.
For proper classification, you can file an SS-8 form and send it to the IRS, as they will help determine for you. For the case of exempt and non-exempt employees, you should revisit the DOL guidelines keenly before making any classification.
2. Improper Recordkeeping or Incomplete Records
Record keeping is probably the basis of proper payroll management. A simple error committed while entering records can result in considerable mistakes such as misclassifications, late payments, and incorrect tax filing. A business that keeps incomplete records risks losing a significant amount of money per employee.
How to Avoid It
Most of the issues resulting from incomplete records occur due to the lack of proper payroll records of employees who have been in the business before.
To prevent such a mistake, you need to maintain proper records of past employees for a period of four years as stipulated by the Internal Revenue Service (IRS). However, to avoid unforeseen inconveniencies, it is imperative to hold on to these payroll records for up to seven years after the employees have left the business.
3. Improper and Delayed Tax Payments
The Internal Revenue Service imposes tax payment deadlines and communicates for the same. However, some small businesses may fail to comply with the tax deadlines due to delays in calculations, filing, and probably due to late deposits.
However, regardless of the reason for non-compliance, late income tax payments for each employee can attract costly penalties, including additional tax interest and tax overcharge, thus raising the principal tax amount and repossession of assets. In extreme cases, the person responsible may end up in jail.
How to Avoid It
Payroll records include tax forms like W2s for business employees and 1099 forms for independent contractors. To avoid mistakes resulting from improper tax payments, ensure all the employees have submitted their tax and social security forms. This ensures you have submitted accurate tax records depending on the kind of employees in your business. A good way to keep up with these records is to use a software such as PayStubCreator to ensure you have everything you need in a secure place to submit taxes accurately and on time.
In most cases, delayed tax payments happen due to proper management of schedules on the payroll. You can quickly rectify such mistakes through scheduling computations and aligning depositing processes.
4. Miscalculating Pay
A wrong paycheck can be distressing to an employee, primarily if the error emanates from missed payments. Wrong calculations can lead to time wastage as you have to devote considerable time to investigate and rectify errors outside the typical payroll cycle.
Most organizations will spend approximately ten days to reverse a payroll error. Some of the miscalculations include: overpaying or underpaying the employee, lack of the first paycheck for recruits, making incorrect retroactive payments, among others.
How to Avoid It
Although minor errors are inevitable, you can avoid the miscalculation error by creating a well-planned payroll process, remaining in compliance, and offering error-free paychecks for your employees.
5. Over-Dependence on Obsolete Systems or Software
The last thing you want in your business is a wrong payroll. Any process used to run your business operations can be faulty, and that’s why it may require revamping from time to time. Proper updates of your software can enhance your payroll management and save you from defects that can arise.
How to Avoid It
To avoid processes and software imperfections, always go for an update regularly. Automation ensures efficient business operations, even in payroll management.
Correct any Payroll Error Immediately
Mistakes can occur if you have done everything possible to ensure proper payroll management. However, avoid delays whenever you identify common payroll errors and deal with it immediately. The sooner you identify and reverse the mistake, the less likely you will face payroll errors consequences.